The notice under this sub-section cannot be issued to any other person, e.g., a person owing money to a contractor who has given a sub-contract to the assessee. The receipt of the assessing officer or the tax recovery officer constitutes a good and sufficient discharge of the liability of such person to the assessee.

A very interesting point arose recently before the Bombay High Court on the question whether the representative assessee could be required to pay for fluctuation in the value of foreign currency where it haddeposited the amount earlier as required under this provision.

In the Oil & Natural Gas Commission vs McDermott International Inc ((1999) 104 Taxman 692), the dispute arose in respect of an arbitration award passed by the umpire. The respondent - a foreign company had in the statement of claim sought an award for an amount of $432,500.35 claimed to have been deducted by ONGC for the purpose meeting the liability of the foreign company for surtax under the Companies (Profits) Surtax Act, 1964.

The Surtax Act was repealed in 1988, but during the time it was in force, it imposed a surtax, in addition to normal corporate tax, in the years in which the chargeable profits of the assessee for the previous year exceeded 15 per cent of its capital computed in accordance with the Surtax Act. According to the foreign company, its chargeable profits did not exceed 15 per cent of its capital as computed in accordance with the surtax due from or payable by the foreign company. Thus, according to it, ONGC had wrongfullywithheld the sum of $432,500.35.

The ONGC had on May 21, 1990, deposited with the income-tax authorities a sum of Rs 88,16,484 on the basis of notices under section 226(3) of the Income-Tax Act, the said amount having been held to be due by the income-tax authorities from the foreign company.

The claim as made in the statement of claim was that ONGC was liable to pay to wrongly withheld, together with interest. An alternative claim was made that giving credit for the amount paid to the income-tax authorities by ONGC, the foreign company was entitled to get $100,733.89 and interest thereon. The stand taken by ONGC was that they had retained the amount under section 162 of the Income-Tax Act, and that this was not a deduction under section 195 of the Act.

ONGC referred to its letter dated April, 20, 1989, addressed to the foreign company informing them that the matter regarding return of surtax in respect of BB/BD and IJK projects had been referred to the deputy commissioner of income-tax and ONGC had notreceived any final decision from the deputy commissioner. The ONGC also referred to a letter received from the income-tax department by which ONGC was directed not to release the surtax amount till further orders.

Reference was then made to an order dated April 4, 1990, received from the deputy commissioner (assessment), special range, Dehradun, informing ONGC that no demand had been raised against the foreign company in respect of surtax, but ONGC was directed to immediately deposit the amount of surtax lying with them in pursuance of a notice under section 226(3) towards liability of income tax. According to ONGC, they had, thus,deposited Rs 88,16,484 in government account on May 21, 1990, which according to them was equivalent to $689,807. Thus, it was denied that there was any wrongful withholding of the amount.

The further case of ONGC was that the accounts maintained by it were in terms of rupees and not US dollars and that the amount of $689,807 retained by them could not be converted at thecurrent exchange rate. ONGC, while admitting that they had deducted the sum of $689,807 during the year 1987 from the invoices of BB and BD and IJK projects, took the stand that this amount was equivalent in rupees to Rs 88,16,484 as on the date when the deduction was made.

The umpire accepted the case of ONGC that though an amount of $432,500 was, at one stage, considered by ONGC as tax deducted at source, the said amount was really the amount retained by ONGC out of the monies paid by them, having regard to the provisions in section 162(2) of the Income-Tax Act.It was also accepted by the umpire that the income-tax department treated ONGC as a representative assessee for the assessment years 1985-86 and 1986-87.

The umpire accepted the alternative claim of the foreign company in respect of the difference in Indian rupee value and US dollar between the date when the deduction was made and the time when the amount was deposited, i.e., May 21, 1990. It was held, inter alia, by the umpire that the contractbetween ONGC and the foreign company was to pay the contract price to the foreign company in terms of US dollars.

Merely because the amount which was immediately payable in US dollar was paid late, whatever be the reason, the nature of the liability to pay back the deducted amount in US dollar did not change into a liability to pay in rupees.

The rate of exchange for conversion of the tax liability in rupees into US dollars would be the rate prevalent on May 21, 1990. As a consequence, the balance due out of deductions made from the invoices had to be refunded to the foreign company in terms of dollars. Consequently, the foreign company was entitled to refund of $100,733.89 with interest thereon with effect from May 21, 1990.

On a petition challenging the award of the umpire, the Bombay High Court referred to the decision of the Supreme Court in PV Raghava Reddi vs CIT (44 ITR 720). The facts in this case were that the non-resident company instructed the assessee, in view of the difficulties in thiscountry in remitting the monies abroad, to credit the amount due to it on account of commission in the account books of the assessee, awaiting further instructions regarding its remittance. The assessee was assessed as the statutory agent of the non-resident company.

The income-tax officer assessed the amounts credited in the accounts of the assessee as the income of the non-resident company. The contention of the assessee was that mere entry in its books did not amount to receipt and that the amounts could not be assessed until they were actually paid over to the non-resident company or dealt with according to its discretion. Rejecting this contention, it was held by the Supreme Court that as soon as the monies were credited to the account of the non-resident (Japanese) company, it should be held that it "received" the same and they were taxable.

Applying the above principle, the Bombay High Court held that the money credited in the account books of ONGC belonged to the foreign company and it was held byONGC as a depositor. The finding of the umpire that the amount was paid under section 226(3) of the Income-Tax Act showed that the amount lying as credited in favour of the foreign company was the foreign company's money and this could be only on the basis that it belonged to the foreign company from 1987.

This was not a case where the deduction or retention was wrong or there was an obligation to refund. In that case perhaps, ONGC would have been liable to refund the sum to the foreign company in US dollars. However, in the present case, ONGC was holding the money only as a representative assess.

The representative assessee could not be asked to pay for the fluctuation in the value of foreign currency between the date of deduction and the date of payment, inasmuch as the date of payment was irrelevant as the liability related to the period of assessment. Therefore, the court concluded that the findings recorded by the umpire were totally ex facie inconsistent and self-contradictory and the award passedby the umpire was clearly erroneous.

There is no doubt that the aforesaid decision lays down the correct principle of law. Once a representative assessee fulfils his obligations of recovering the tax and depositing it with the treasury, he cannot be made liable or responsible for any other burden arising from fluctuations in the rates of foreign exchange. This decision will certainly help Indian agents who are required to pay amounts to non-residents in foreign currency.

The author is Supreme Court advocate